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Should you buy a property in a trust or your own name?

Trusts have been around for hundreds of years and have traditionally been used by the wealthy to protect their assets and pay less tax.  While this may sound effective, if you ask around you’ll find that few actually use a trust structure when buying property.

Here we share what a trust structure is, including the pros and cons so you can work out if it’s right for you.

What is a trust structure?

A trust structure is an ownership structure where the legal owner is not the beneficial or eventual owner.  In other words, a person or company owns the asset on behalf of someone else.  This creates a separation between the owner of the asset and who will gain the benefit of the asset.

What are the advantages of a trust?

In the case of a property, a trust structure increases the chances that the asset will not form part of a person’s asset base in the event of legal or creditor action. It also provides flexibility in distributing both income and capital gains to a group of people at the discretion of the trustee. Under normal circumstances, the income and any capital gains belong to you, the owner. In a trust situation, they belong to the trust and the trust has to distribute them based on the terms of the trust deed.

But while protecting the asset and being able to distribute the income and capital gains sounds advantageous, there are downsides and trusts aren’t as widely used as you’d expect.

What are the disadvantages of a trust?

A trust structure can be costly and complex to set up. It will create an extra set of accounts, documentation (such as meeting minutes) and lodgements.  Trust tax returns are usually more expensive than personal tax returns as well due to their complexity.  With a trust structure, you will be subject to greater land tax, as the tax threshold for trusts differs to that of individuals.  Also, if you’re buying a house to live in, there may be tax implications for the capital gains tax exemption.

In the case of an investment property, a trust can distribute income, but it can’t distribute a loss. If your investment property gives you tax deductions that you offset against your normal income, a trust structure won’t allow you to use those deductions.  A trust will hold onto any losses and only use them to offset profits. Once you take depreciation into consideration, it could take a while until the property is ready to return after-tax profits, during which time you won’t be getting any tax relief. For some people, this isn’t an issue. But for many property investors, the tax deductions over the first 10 years are often the key to affordability and pursuing other financial goals such as paying off a home loan.

Is a trust structure right for me?

You’ll see from the above that there is no perfect solution, with each scenario presenting both advantages and disadvantages.

What’s important is that you understand what you’re trying to achieve with your property investment and the long-term implications.  You don’t want to be changing structures around in the future as you’ll incur potential stamp duty and capital gains tax costs.

It’s therefore essential that you seek the right legal, financial and tax advice upfront.  There are many factors to consider, and if you don’t cover them all, you could be in for an unpleasant surprise.

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  • As COVID-19 continues to spread, we would like to take a moment to let you know what Financial Spectrum is doing to respond.

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